PayPal bought Venmo in 2013 for a whopping $800 million. Since then, Venmo has become a significant player in the financial tech space. As of 2018, its users have grown to a staggering 22.9 million. The Venmo app is free to use, so a common question people ask is how does Venmo make money? In this article, I’ll answer this question as well as describe how Venmo works.
How does Venmo make money? Venmo generates money through transaction fees. It is a financial platform that anybody can use for free. However, it charges a 3 percent processing fee for every payment received through credit cards. How does this fee compare with PayPal? Venmo’s parent company, PayPal, charges a slightly lower fee of 2.9 percent for every credit or debit card transaction.
Read on and you will learn more details about how Venmo makes money and how it differs with PayPal and other online financial platforms.
How Does Venmo Make Money?
Venmo is free to use, and it does not charge interest on funds. So, how come it is making so much money? Venmo gets its income from end-users or ordinary consumers by charging 3 percent for any credit card transaction.
When you use your credit card to connect to Venmo, the company will charge 3 percent on all transactions that you will make. If it’s your business connecting to Venmo, the same 3 percent will be charged for every transaction. This is how Venmo makes money.
What Is Venmo?
Venmo is a mobile app that you can download and use for free. You can receive and send money if you have Venmo on your mobile device. PayPal acquired this company in 2013. If you have a business, you can connect it to Venmo, and you can also use it for free. But this app is only available for users in the United States.
Iqram Magdon-Ismail and Andrew Kortina developed the Venmo app in 2009. They were roommates at the University of Pennsylvania. They developed the app originally as a text-only money transfer service.
Their startup was released to the public in 2012 as an app, which Android and iPhone users can use to transfer money. Venmo leveraged the P2P (peer-to-peer) platform by enabling its users to connect their bank accounts or credit cards to the app. Users can then receive and send money directly using their mobile devices.
To use Venmo, you have to download the app on your mobile device. Once it is installed, you can now connect your bank account or credit card to the app. Remember that the app will charge you 3 percent for every transaction, whether you are sending or receiving funds.
How Does Venmo Work?
When you have connected your credit card, debit card, checking account, or bank account, the Venmo app will use these accounts to complete your requests for either receiving or sending funds. You can “request” charges from your friends and other people you know who also use the app.
The company can add these people the same way as they are added in social media networks such as Twitter, Facebook, and others. As soon as you have sent your request, your friend or other people can complete (accept) or deny your request.
You can also remind the person being charged about your request. As soon as the funds are transferred, you can choose to keep your money in your account. The money is now considered as your Venmo balance. You can also transfer the funds back to your credit card or bank account.
You are also allowed by Venmo to write short memos for your requests. Moreover, there is an API or application programming interface in Venmo that users and other businesses can use to link payment services.
The Money Making Process of Venmo
As of 2018, there are two money making processes used by Venmo.
1. 3 Percent Service Fee
If your business is using Venmo or if you are using a credit card, Venmo will charge you a 3 percent service fee based on the amount of your transaction. The app does not charge interest on funds. It is one of Venmo’s ways of generating income.
2. 2.9 Percent Service Fee
Venmo has a business model, and it is the second principal way the company makes its income. This business model charges businesses a 2.9 percent service fee when their customers use the app to pay for their products or services.
Unlike PayPal, Venmo does not invest in its users’ balances to make money. As such, Venmo’s revenues are minimal compared to PayPal’s generated income. But some observers predict that this setup may change soon.
In 2019, Venmo planned to increase its use of the transactions between businesses and customers. It also announced in 2018 that it would partner with various apps, including those that are used by fast-food chains and companies that deliver food.
Also in 2018, Venmo revealed that it has partnered with Uber. That means users can pay for Uber Eats and Uber using Venmo. These are the business deals that Venmo has tried and is trying to develop to produce more income.
How Is Venmo Monetized?
It seems that PayPal does not want to reinvent the wheel with Venmo. It is bent on continuing its core strategy of monetization – that of making online payments easier for its users. In other words, the future growth of Venmo will come at the expense of PayPal’s growth.
Based on a statement found on Venmo’s website, ultimately, they are not making money from money transfers using their app, mainly if the money is coming from a Venmo balance, a debit card, or a bank account. However, a transaction that is funded with a credit card payment is charged a 3 percent standard fee. This fee will come from the credit card company. Venmo simply passes these charges to the consumer.
A more considerable amount of money that Venmo generates comes from the per-transaction fees that the businesses are charged with. This is where Venmo’s connection with PayPal comes in. There are about two million businesses that are using the services of PayPal.
These connections allow Venmo to generate two distinct types of incomes. The first one is made with the help of a “smart payment button,” which can be added to other apps. It can also be used for in-app purchases.
For instance, Uber added a type of service for its users that allows them to pay for their rides and the food they bought from Uber Eats using Venmo. Users don’t even have to close their Uber apps to use Venmo as they can do this inside the Uber app. Also, users are allowed to divide the cost of the food items and rides among themselves through the Uber app.
Venmo Debit Card
The Venmo debit card is the second source of income from business users. It’s directly drawn from Venmo balances and done through MasterCard. You can use this debit card in businesses that accept MasterCard.
This second revenue generator enabled Venmo to expand its operation beyond its original P2P platform. It also enabled consumers to make transactions directly with physical and online retailers.
Venmo charges business users a 2.9 percent service fee plus $0.30 per transaction for both of these service options. Businesses find this setup advantageous even if they are charged with service fees because they get hundreds of new customers in return.
Richard Crone, a business consultant, commented that having a working relationship with Venmo is just like working with a credit card processor with added conveniences. Businesses could get more exposure to new customers more than what they could get from their accounts on Twitter and Facebook.
The results cannot be denied. At the end of the fourth quarter of 2019, Venmo has generated around $40 million in revenues. The net payment volume of the app has reached a staggering $29 billion, which represents a 56 percent increase from the past year. For 2019, the company has projected total revenues of $300 million.
As of late, PayPal has no plans of expanding the monetization efforts of Venmo apart from the three service products that it is offering its users. A company official said that they need to do some heavy lifting to continue expanding in new areas of concern. They don’t need additional service products that could distract their efforts.
There’s a Social Side of Venmo
One feature that sets Venmo apart from its competitors is its social feed. It makes the transactions transparent, which is typically private in some fintech platforms. The feed appears to be frivolous because of the inside jokes and the many emoji-filled payment descriptions.
In Venmo, transferring funds is fun. You can jazz up your transactions with emojis, which illustrate the items being traded in a fun and interesting way. You can use many fun emojis inside the app to describe your exchanges.
It is not a typical social media platform like Twitter or Facebook. However, it has a public record that can reveal certain social dynamics, such as who’s been out with whom and where. For instance, one user admitted that she uses Venmo to check if her ex-boyfriend and his new girl were still seeing each other.
So, even if Venmo’s public record is not designed to be that way, people are interested in viewing its social feed. Some observers believe that this feature gives the app a decided advantage over its competitors. Venmo has taken the awkwardness out of requesting a friend to pay their portion of whatever they have bought together.
Is It Safe to Use Venmo?
Every online financial transaction faces the risks of hacking and security breaches. The internet is always vulnerable to opportunists who know how to manipulate software and applications. To safeguard and secure all financial transactions, Venmo is adhering to the highest online security standards.
Venmo utilizes data encryption technology to protect its users against unauthorized and illegal transactions. All user information is stored in secure servers and secure locations. The app also provides its users the option to set up their PIN codes for mobile apps.
Although precautionary safety measures are in place, some reports still indicate that there are users who lost sums of money, with some up to $3,000 from their Venmo accounts. Thus, it is imperative for Venmo users to strictly follow the safety rules set by Venmo to prevent such losses.
Are There Problems in Venmo?
Some have pointed out that Venmo has been slow in reacting to these security breaches. For instance, Ken Paxton, the Attorney General of Texas, announced in 2016 that PayPal had settled an amount of $175,000.00 to the state for its negligence in safety, privacy, and security practices.
Also, Venmo reached a settlement with the Federal Trade Commission regarding its failure to disclose privacy setting information to consumers. The FTC also found out that Venmo violated the Safeguards Rule of the Gramm-Leach-Bliley Act.
The Safeguards Rule requires financial companies to put safeguards to protect the integrity, confidentiality, and security of customer information. Venmo was subjected to biennial, third-party audits for 10 years to ensure that it will comply with these rules.
How to Protect Yourself While Using Venmo
Protect yourself while using Venmo by following the tips below:
- Use Venmo to exchange money only to those you are familiar with.
- Avoid leaving large amounts of money in your Venmo balance.
- Hide your transaction histories by changing your Venmo social network to “private.” The default for the app’s new accounts is in the “public” setting.
- Process Venmo money transactions immediately to your linked bank accounts.
Conclusion – How Does Venmo Make Money?
So to recap, how does Venmo make money? Venmo generates its revenues through transaction fees. It is an online financial tool that everybody can use for free. However, this company incurs processing costs. It charges a 3 percent processing fee for every payment it receives through credit cards. PayPal, its parent company, charges a slightly lower fee at 2.9 percent, for every credit or debit card transaction.